Thursday, 2 May 2013

CPI Inflation Analysis (The Bugle)


“Sell in May and go away.” This was an adage used for stock market investors when considering the timing of their investments.  With property the timing of when to buy and sell is equally important and I have often said that you make your money when you buy, not sell. It is essential to buy at the best possible price to ensure that you have the greatest chance of a profitable return. You could do a lot worse than spending the month of May on the Dolphin Coast, and if the last week’s perfect weather is an indication, we can expect a blissful month ahead. The first quarter has been particularly busy for our Seeff Ballito office and has provided every indication of the signs of a recovery in the residential property market. The overall consensus is that demand is up but pricing down. More transactions are being concluded but at lower prices. Good news for buyers but frustrating for sellers. The March consumer price inflation (CPI) data was released by StatsSA and shows inflation remaining at 5,9%, just below the SA Reserve Bank’s upper target limit of 6%.  The residential rentals component of this CPI is currently 4,7%, which is still low despite a strengthening residential rentals market. The acute shortage of available rental stock along the Dolphin Coast, which anybody who has been searching for a suitable rental property can testify to, is the first building block required for a sustained recovery in the buy-to-let market. Rental prices have been bid up to such an extent that Simbithi rentals are now regarded as well above average and in many instances higher than similar properties within Zimbali. Currently the overall buy-to-let purchases are only 8% of total purchases, which remains relatively low, considering that this figure was 25% in 2004. The Housing and Utilities CPI component includes the electricity component, which remains high at 10,2%. The national electricity price regulator of South Africa (NERSA) did not however grant Eskom the requested price increases, which suggests that this inflation rate can be expected to come down. The Water and Other Services CPI component was also high at 9,2%. It has been these “administered” prices, including municipal rates, which has driven up the cost of property ownership so dramatically over the past few years. Rental rates can be expected to increase and escalation clauses in new leases can be expected to default to 10% on average. I think the days of your typical residential rental only escalating by 5% per annum may be limited and resisted by many Landlords.

With overall CPI inflation expected to average 5,5% for 2013, the expectation is that interest rates will remain unchanged for the duration of this year. One interesting item noted when analyzing the breakdown of CPI inflation according to expenditure group, is that the very low expenditure group has an official CPI inflation rate of 6,5% while the very high expenditure group has a rate of 5,9%. Inflation can therefore be seen as a regressive tax in that it impacts more negatively on the poorer segment of the population. Transport CPI inflation is currently 7,5%. If you thought your school fees were stubbornly high and growing you would be correct – Education CPI inflation is currently 9%.
With the escalating cost of living being such a harsh reality for all of us, investing to hedge against this becomes a critically important decision. Buying an investment property in a high demand area is one of the proven best ways to protect yourself.

(Author: Andreas Wassenaar, published 1st May 2013 in The Bugle)

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